SECP mandates companies to report on wage disparities

Afshan Subohi

To tackle a major obstacle to sustainability and growth in Pakistan – wealth disparity – it’s imperative to systematically assess and reduce both inter-sectoral and intra-company high-income gaps to more acceptable levels.

While facts about inequality have been reported for several years, there is now a growing consensus across a broad spectrum of opinions regarding its corrosive effects on both the economy and society. There’s a pressing urgency to not only contain but also reduce this inequality.

The growing inequality undermines development efforts in several ways: 1. It complicates poverty reduction initiatives, 2. It fosters a polarized environment and constrains social mobility, 3. It impedes efforts towards fiscally sustainable social welfare system, 4. It erodes public trust on the government as fair mediator 5. It exacerbates crime level 6. It breeds social unrest as the powerful elite engage in unethical practices to perpetuate their power 7. It may incite violent conflicts in multi-ethnic nations, detrimental to the natural process social cohesion necessary for qualitative improvements in democracy 8. It fosters brain drain in developing countries like Pakistan, increasing dependence on costly overseas expertise.

Putting aside the inter-sectoral dimension, this article delves into the issue of intra-company income disparities. A recent global study illuminated wage ratios across various nations, identifying the five worst performers in this regard. The wage ratio pertains to the income of an average employee compared to that of the CEO within the same organisation. (Refer to the table sourced from a website for further details.)

The SECP has consistently played its role in improving workplace conditions, evidenced by initiatives such as the issuance of a Code of Corporate Governance, guidelines for board meetings, and an environment, social and governance (ESG) framework for listed corporations.

In absence of systematic data on intra company income inequality in the private sector, the discussion here is based on anecdotal evidence. For instance, in top private banks in Pakistan, CEOs can earn as much as Rs20 to 30 million rupees per month when considering monetised perks, privileges and bonuses in their income calculations. Meanwhile, employee at the lowest rung of the hierarchy (such as cleaners, guards, doormen, runners and tea boys) often working on contract for years, may earn only Rs25,000 to 35,000 per month. The disparity is so vast that it’s challenging to express in a straightforward ratio.

“For every rupee earned by an average employee, the average CEO takes home over Rs200. In extreme cases, such as in big local and multinational companies in industrial and services sector, the gap between the annual salary of the top and the bottom rungs is so staggering that the wage ratio fails to capture the stark reality,” remarked a labour market analyst anonymously, constrained by company policies from interacting with the media without permission.

“The issue of income and wealth inequality is closely intertwined with the growing empowerment of corporate elite and the simultaneous disenfranchisement of workers. This dimension is recognised by governments and investors alike as a source of growing discontent in society and a potential threat to a functional market economy,” noted an economist.

The subject has been under scrutiny for many years, but following the 2007-2008 financial crisis, several developed countries, including the US, updated disclosure rules. Companies are now mandated to report pay ratios to regulators. While the situation remains far from ideal, there appears to be a deliberate effort by governments to address income inequalities that contribute to market-distorting wealth disparities.

A few years ago, a senior officer at the Securities and Exchange Commission of Pakistan (SECP) referenced US’s Dodd Frank Act during discussion on wage gaps between top management and average employees in Pakistan. According to him, the regulator was cognizant of the issue and was defibrating on implementing necessary changes in disclosure rules for listed companies.

Both the SECP and Competition Commission of Pakistan (CCP) responded to queries on this matter. While the SECP, without committing to mandating companies to improve wage ratios, mentioned recent directives to report gender pay gaps, the CCP acknowledged the issue’s significance but deemed it beyond their mandate. 

“The SECP has not yet mandated private companies to report their remuneration details or their income gaps. However, the Commission issued a Circular (on April 10, 2024) directing listed companies to include a statement on gender pay gaps in their annual reports,” stated in its written reply.

“The SECP is dedicated to fostering equality and diversity within the corporate sector through collaborative efforts with stakeholders. We are open to all suggestions from the public and stakeholders to create a more inclusive and equitable workplace environment,” it added. 

In expressing its intent to make regulations relevant and effective, the commission remarked, “Pakistan, as a developing jurisdiction, is steadily improving regulations gradually. The SECP has consistently played its role in improving workplace conditions, evidenced by initiatives such as the issuance of a Code of Corporate Governance, guidelines for board meetings, and an environment, social and governance (ESG) framework for listed corporations.”

The CCP, however, the matter beyond its mandate. It stated, “While the issue of pay ratios in private companies is important for social justice and economic well-being, it falls outside the CCP’s purview.

The CCP’s efforts are directed towards safeguarding fair competition in the marketplace and preventing distortions caused by anti-competitive conduct. Consequently, the CCP does not assess pay ratios in private companies or tackle intra-company income inequality. It is bound by the Competition Act, 2010,” it noted.

(The writer can be reached at asubohi@hotmail.com).